By Just what does the term “institutional crypto” even mean? It sure sounds oxymoronic, doesn’t it? It’s quite ironic that traditional financial institutions are moving towards adopting a relatively young technology which was initially designed to rid the world of them.
Following a series of events, announcements & developments that took place this past month, it’s becoming clear that these institutions may indeed be coming for our crypto.
This could be seen as great news for some, alarming news for others and it all depends on what investors are seeking to gain from crypto & blockchain. Some might opt for the complete, independent control over their assets while others dream of an efficient an all-inclusive global economy and some of course just want to get filthy rich.
What is clear as day, for now, is the impending clash of their two cultures found within Wall Street’s suits & the crypto enthusiasts out there.
While the influx of institutional money might send crypto prices sky-high the clash between the types of financial investors adds more uncertainty & volatility for at least the near future.
Custody At Institutional Level:
A very notable and important development was announced just two weeks back. Fidelity will begin offering a digital asset trading service. Fidelity, being the sixth-largest fund manager on the planet announced a project which will cater specifically to the trading demands of large institutional investors and most importantly they will ultimately provide top tiers services such as “institutional-grade custody”.
For the advocates out there who believe in the “be your own bank” mantra aka the philosophy of bitcoin this idea of third-party custody totally contradicts the “trustless” ideas upon which cryptocurrency is built upon.
However, many had predicted the inevitableness of this happening. Let’s say corporations such as the likes of banks, investment firms, brokerages hedge funds, following this non financial institutions are to join the world of crypto, the legal, compliance, insurance and lastly risk management demands that come along with these sectors basically almost require that they have to seek third-party custodians to hold their assets in order to handle the risks.
We also have to come to the realisation, that currently a vast amount of the world’s crypto assets are currently in the custody of third-party operators -for example, custodial wallet providers like Coinbase or at the myriad of centralized crypto exchanges where customer assets are traded with assets of owned by others.
The key difference here is that services of this nature are currently in development for use by hedge funds as well as other investment firms by heavily regulated firms such as the likes of Fidelity, custodial banks such as State Street and Northern Trust are all working on rolling out similar services.
Let’s not forget that on the other end of the spectrum, many providers who started out as crypto companies have gone on to earn regulatory status as qualified custodians which of course allows them to also chase down compliance-sensitive institutional investors as potential clientele. BitGo is one of these providers who just last month received a charter from the South Dakota Division of Banking as well as Coinbase who received a custodian license from the New York Department of Financial Services as reported by CoinBeat last week.
Then, there is the Intercontinental Exchange aka ICE who are owners of the New York Stock exchange who are currently preparing to rollout Bakkt, a new bitcoin futures trading service – pegged for a possible December release as announced by the company just last week. The notable difference here with the future contracts that were launched last year by the Chicago Mercantile Exchange and the Chicago Board of Options Exchange is that Bakkt’s will work around physical delivery as opposed to that of cash-based settlements and of course this will require custodial services.
The Death Of ICO and Advent of STO:
The new race to serve institutions comes hot on the heels as the hype train around ICOs has dwindled as a result of the dramatic drop in the prices of tokens that are attached to decentralized applications and this is due to the many regulatory clashes from the Securities and Exchange Commision, whereby commissioners have argued that most if not all ICOs were in breach of securities registration rules.
Enter the STO, the hottest new keyword being flung around the industry, the idea of a security token offering in many aspects is a far less revolutionary idea than that of an ICO. With ICOs, in many cases, they offer “utility tokens” in which their governance structure comes with a unique crypto economic model which rewards certain behaviours within a decentralized network while STO’s, on the other hand, is just a crypto-based variety of traditional assets, for example, bonds or equity.
R3, however, the distributed ledger technology consortium which was found by large banks is already touting these security tokens as “the third blockchain revolution.”
Which brings us to the utter irony that is the fact that a group founded by Wall Street firms, which initially frowned upon and scoffed at the “absurdity” surround the hype of the ICO market of 2017, are now using language which could be seen as hyperbolic. These STO’s could perhaps have a large impact, most notably with regards to smart contracts which could assist in the more efficient management of cap tables and ultimately bypass any potential underwriters in a more direct issuer-to-investor business model.
To be absolutely clear, this impact will more than likely be felt the most by traditional investment firms as well as other accredited investors who participate within primary securities. It could be a good idea to raise capital and open up avenues for new models for doing so with institutional investors.
Lastly, it must be noted that this is in no way about democratizing finance as was found with the ICO craze, what with its direct reach into retail markets was meant to be.
Institutional Framework Meets Non-Institutional Model:
You’ve probably noticed a pattern here, right? New custodial & trading services are being made available by large, regulated companies, in preparation for an apparent influx of new securities which make use of smart contracts and blockchain tech in order to manage transfers of old-school and traditional assets. With all of these aimed directly at the inevitable advent of institutional investors entering the world of crypto.
Of course, with all this happening, bitcoin, ether and other crypto investors could potentially invite a flood of incoming orders from these rich investors which could make them salivate at the prospect of making more money with the expected price rises. 
While that could indeed be the case, it is in no way going to be a walk in the crypto park. One of the main reasons for this notion is with all the work being done in order to integrate cryptocurrencies into a regulated space there is one glaringly obvious contradiction that will not be an easy reconciliation.
These Wall Street smart guys all like to see crypto as a new asset class, perhaps one that could be put right next to stocks, bonds and commodities in the portfolios of their clients. However, it must be noted, that for the time being, while early adopting retail investors of all sizes still dominate the crypto realm, this so-called asset class if it can even be dubbed as such, will most definitely behave differently to that of traditional assets.
Why? Well for now, when you purchase bitcoin, ETH or any pure form of crypto (stablecoins not included) you’re purchasing a piece of real estate or claim or a bond, you’re actually purchasing an idea.
This idea, which we know to be supported by an extremely avid, motivated and enthusiastic while sometimes irrational community, is in support of a paradigm that would, in fact, prefer to see these traditional institutions removed from all economies.
Do you feel that Wall Street analysts might have a tough swallowing this contradiction and others that might arise? Will they be ready for the surprises that might befall them? Let us know your thoughts
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